Manufacturing Overhead
Definition: All manufacturing costs EXCEPT direct materials and direct labour.
Also called: indirect manufacturing cost, factory overhead, factory burden
What's Included
| Category | Examples |
|---|---|
| Indirect materials | Solder, glue, lubricants |
| Indirect labor | Supervisors, janitors, materials handlers |
| Factory utilities | Heat, light, power for factory |
| Factory depreciation | Equipment, building |
| Factory insurance | Coverage on manufacturing facilities |
| Maintenance & repairs | Production equipment upkeep |
What's NOT Included
| Cost | Why Excluded |
|---|---|
| Sales commissions | Selling cost (period) |
| Corporate rent | Administrative (period) |
| Advertising | Selling cost (period) |
| Executive salaries | Administrative (period) |
The Location Test
Factory utilities, depreciation, insurance = Manufacturing Overhead (product cost)
Office utilities, depreciation, insurance = Period cost (never touches inventory)
Why It Matters
Manufacturing overhead is a product cost—it flows through inventory:
- Incurred → debited to WIP
- Units complete → moves to Finished Goods
- Units sold → becomes COGS
Period costs skip inventory and hit the income statement immediately.
The Indirect Labour Confusion
| Labor Type | Classification | Reasoning |
|---|---|---|
| Assembly worker | Direct labor | Traceable to specific units |
| Factory supervisor | Manufacturing overhead | Can't trace to specific units |
| HR manager | Period cost (admin) | Not in manufacturing facility |
All three are "labour," but only assembly workers are direct labour.
North: Where this comes from
- Manufacturing Costs (one of three components)
- Direct vs Indirect Costs (MOH is the indirect portion)
East: What opposes this?
- Selling and Administrative Costs (period costs, not product costs)
- Direct Costs (traceable, not overhead)
South: Where this leads
- Overhead Allocation (how to assign to products)
- Predetermined Overhead Rate (estimate for the period)
- Activity-Based Costing (more accurate allocation)
West: What's similar?
- Conversion Cost (DL + MOH—what transforms materials)
- Common Cost (supports multiple products)